Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

03/30/2017

The Dystopian Reasons for Separating Corporate Law and Social Welfare

I am a great admirer of Bill Bratton's work in corporate law, which is always learned, informed, and provocative. His latest essay, The Separation of Corporate Law and Social Welfare, available at SSRN: https://ssrn.com/abstract=2927150, is no exception. As the abstract explains:

A half century ago, corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. That vision was challenged on the ground during the 1980s, when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and social welfare. The distance between the welfarist enterprise of a half century ago and the concerns that motivate today’s corporate legal theory has been widening ever since. This Essay examines the widening gulf. It compares the vision of the corporation and of the role it plays in society that prevailed during the immediate post-war era, before the fulcrum years of the 1980s, with the very different vision we have today, and traces the path we took from there to here. It will close with a brief prediction regarding corporate law’s future.

Yet, I confess that I'm not convinced. Oddly, Bill doesn't discuss what I think remains the definitive work on this issue, which is Gordon Smith's essay The Dystopian Potential of Corporate Law, available at SSRN: https://ssrn.com/abstract=976742. As Gordon's abstract explained:

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal.

This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question.

In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.

Even though there is much to admire in Bratton's essay, I remain convinced that Gordon's essay was the (not a, but the) drop the mic moment in this debate.

Having said that, I'd love to see a debate between Bratton and Smith in which they directly joined issue. it'd be a heavyweight rumble well worth the price of admission.